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The Importance of Consolidated Financial Statements in Corporate Governance

As Vietnamese enterprises continue to expand in scale, the parent-subsidiary company model has become increasingly common. Consolidated financial statements (CFS) are not only a legal requirement but also serve as a vital foundation for corporate governance. They enable management to comprehensively understand the financial position, quickly identify opportunities and challenges, and make timely strategic decisions.

The following article will provide a detailed analysis of the concept and essential role of consolidated financial statements in corporate governance. It will also highlight common challenges and proposed solutions, complemented by expert insights to offer a thorough and in-depth perspective.


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Definition and Legal Framework of Consolidated Financial Statements


What are Consolidated Financial Statements?

Consolidated financial statements are documents that combine the financial reports of a parent company and all of its subsidiaries—whether directly or indirectly controlled by the parent—in order to objectively reflect the financial position, business performance, and cash flows of the entire group as a single economic entity.


Legal Requirements

According to Circular No. 202/2014/TT-BTC, parent companies are required to prepare consolidated financial statements if they hold absolute or relative control over their subsidiaries. These statements include the Consolidated Balance Sheet, Consolidated Income Statement, Consolidated Cash Flow Statement, and Notes to the Consolidated Financial Statements.


The Key Role of Consolidated Financial Statements in Corporate Governance


Providing a Comprehensive View of Business Performance

Consolidated financial statements offer management and stakeholders a complete picture of the group’s financial position, rather than just the performance of individual subsidiaries. This enables executives to easily compare performance across business units, quickly identify high-performing segments, and adjust strategies where necessary.


Supporting Strategic Decision-Making

With aggregated financial data, leadership gains accurate insights for developing growth plans, restructuring initiatives, or investing in key projects. Consolidated financial statements serve as a “compass” for long-term strategy, minimizing the risk of misinformed decisions based on isolated subsidiary data.


Enhancing Transparency and Compliance

For investors, banks, and regulatory bodies, consolidated financial statements improve transparency by eliminating intra-group transactions and intercompany balances, thereby increasing the reliability of financial reporting. At the same time, they help businesses meet international accounting standards (IFRS), which is essential for global integration.


Facilitating Capital Raising and Partnerships

A complete and accurate set of consolidated financial statements is a powerful tool for convincing investors and financial partners. These stakeholders rely on consolidated reports to assess the group’s growth potential, profitability, and risk exposure before making investment or partnership decisions.


Improving Risk Management Efficiency

Consolidated financial statements help identify liabilities that exceed liquidity, underperforming investments, or even internal fraud. This allows businesses to promptly implement measures to mitigate financial risks.



“Consolidated financial statements are not merely a requirement under accounting standards, but truly serve as a ‘shield’ that helps businesses detect financial risks early, optimize capital structure, and enhance competitive advantage,” – Mr. Nguyen Thanh Lam, Partner of RSM Vietnam, Director of RSM Hanoi.


This statement affirms that consolidated financial statements are a strategic tool closely tied to effective governance and the sustainable development of a business.


Common Challenges and Solutions


Incomplete Elimination of Intra-Group Transactions

  • Challenge: Transactions between the parent company and its subsidiaries, or among subsidiaries themselves, are prone to duplication.

  • Solution: Implement accounting software with a consolidation module to automatically reconcile and eliminate intra-group transactions. Regularly review accounting records and provide staff training.


Inconsistent Accounting Policies

  • Challenge: Subsidiaries may apply different accounting policies, resulting in inconsistent data.

  • Solution: Develop and issue a “Group Accounting Policy Manual” to ensure standardization. Organize internal workshops to update and enforce compliance.


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Aligning Accounting Periods

  • Challenge: Subsidiaries operate on accounting periods that differ from the parent company.

  • Solution: Adjust the subsidiaries' financial statements to match the parent company's reporting period by allocating and modifying figures proportionally to ensure consistency.


Determining Non-Controlling Interests

  • Challenge: Misallocation of profits attributable to minority shareholders.

  • Solution: Apply the standard formula (profit × minority ownership percentage) and require supporting documents and shareholders’ resolutions to ensure accuracy.


Staying Updated with International Standards

  • Challenge: Multinational corporations must comply with IFRS, while some subsidiaries only follow VAS.

  • Solution: Establish an "IFRS Conversion Team" dedicated to monitoring, evaluating, and guiding the transition process in collaboration with international audit firms.


Conclusion


In a competitive and volatile business environment, consolidated financial statements play a crucial role in corporate governance by providing a comprehensive overview, supporting decision-making, enhancing transparency, and improving risk management efficiency. To maximize the benefits, businesses should:

  • Implement technology (ERP, consolidation software) to automate processes.

  • Develop unified accounting policies and provide staff training.

  • Review and monitor intra-group transactions and allocate non-controlling interest accurately.

  • Stay up to date with accounting standards, particularly IFRS.


Properly implementing these solutions will not only ensure legal compliance but also create a strong foundation for sustainable growth and attract resources from the capital markets.


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